Wednesday, April 29, 2015

No. 96: STOLI and the Bazemore Criminal Case

On April 21, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit handed down a unanimous ruling in a criminal case against Vincent Bazemore. I did not write about the case previously, but the appellate ruling prompted me to do so at this time.

The Criminal Charges
On October 3, 2012, a federal grand jury indicted Bazemore on four counts of mail fraud in a scheme to obtain commissions by inducing insurance companies to issue stranger-originated life insurance (STOLI) policies to unqualified applicants. The counts relate to three policies issued by Principal Life Insurance Company and one issued by Transamerica Occidental Life Insurance Company. Other companies mentioned in the indictment are ING Annuity and Life Insurance Company, John Hancock Life Insurance Company, Sun Life Assurance Company of Canada, and Metropolitan Life Insurance Company. (See U.S.A. v. Bazemore, U.S. District Court, Northern District of Texas, No. 3:12-cr-319.)

The Allegations
According to the indictment, the applications Bazemore submitted contained materially false and fraudulent representations. They include but are not limited to these seven areas: (1) false and grossly inflated statements of the applicant's net worth and income, (2) forged and fraudulent letters from Certified Public Accountants verifying the false financial information in the applications and related financial documents, (3) forged signatures of the applicant, (4) false statements that the purpose of the insurance policy was for estate planning, (5) false statements that the policy was not to be transferred to third parties, (6) false statements denying third parties had promised to pay premiums in return for an assignment of the policy, and (7) false statements that the applicant was not borrowing money to pay the premiums.

Subsequent Developments
Bazemore was arrested shortly after the indictment was filed, and he has been in custody ever since. In July 2013, after a three-day trial, the jury found him guilty on all four counts in the indictment.

In March 2014 the district court judge sentenced Bazemore to 240 months in prison on each of the four counts, to run partially concurrently and partially consecutively for an aggregate sentence of 292 months, followed by three years of supervised release. The judge ordered Bazemore to pay restitution of slightly more than $4 million and a special assessment of $400. The judge did not order a fine because Bazemore does not have the resources or future earning capacity to pay a fine.

Bazemore appealed the verdict, the sentence, and the restitution. The appellate panel affirmed the verdict, vacated the sentence and the restitution, and sent the case back to the district court for proceedings consistent with the appellate opinion. The appellate panel ruled that the district court judge had erred in the calculation of the length of the sentence and the amount of restitution. The appellate opinion explains the panel's reasoning. (See U.S.A. v. Bazemore, U.S. Court of Appeals for the Fifth Circuit, No. 14-10381.)

General Observations
Bazemore's actions that led to the indictment and the guilty verdicts are outrageous. However, my impression, based on my review of actions taken by the defendants in many other STOLI cases, most of which were civil rather than criminal cases, is that Bazemore's actions are typical of actions taken by STOLI defendants.

I am offering a complimentary 32-page PDF consisting of the 15-page indictment, the one-page jury verdict, and the 16-page appellate opinion. Send an e-mail to jmbelth@gmail.com and ask for the Bazemore package.

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Monday, April 27, 2015

No. 95: Life Partners and the Inadequacy of the Bankruptcy Trustee's Website

As I reported in recent weeks, the bankruptcy court judge in the Life Partners Holdings, Inc. (LPHI) case approved the appointment of H. Thomas Moran II as the Chapter 11 Trustee to operate the company in bankruptcy, and the Trustee established a website (www.lphitrustee.com) to keep affected parties informed of developments. In this follow-up I discuss the inadequacy of the Trustee's website.

The April 17 8-K Report
On April 17 LPHI filed an 8-K (material event) report with the Securities and Exchange Commission (SEC). The report contains four disclosures, which are paraphrased below. The expression "LP Market" refers to "a password-protected, limited access, web-based platform where investors in life settlement policies could place their positions for sale to a third party." Here are the disclosures:
  1. On April 9 the Trustee suspended all company activities related to the resale of positions, including suspension of the LP Market.
  2. The Trustee is investigating the business and will determine whether to reopen the LP Market. Should he decide to do so, he will make an announcement.
  3. LPHI updated its website (www.lphi.com) to include a link to the Trustee's website. The LPHI website continues to provide access to all LPHI filings with the SEC.
  4. On April 17 the Trustee released a list of 19 frequently asked questions. They and the answers to them are in an exhibit attached to the 8-K. There are ten questions about life settlement policies, eight questions about the bankruptcy, and one question about the Official Unsecured Creditors Committee.
As of the end of the day on April 24, the Trustee's website had not disclosed the existence of the April 17 8-K, let alone its content. This is surprising, not only because the frequently asked questions and the answers to them are important, but also because the 8-K exhibit showing the questions and answers is entitled "LPHI Trustee Website FAQ."

Other Recent 8-K Reports
The April 17 8-K report was the fourth 8-K filed subsequent to the appointment of the Trustee. The first was filed March 31. It disclosed the suspension of trading in LPHI shares as of the opening of business on March 30, and also disclosed the March 25 resignations of Frederick J. Dewald and Harold E. Refuse as LPHI directors. The Trustee's website mentions the existence of the March 31 8-K and says "The filing can be viewed on the SEC's Edgar system." The reader who clicks "Read More" is given a link to the 8-K.

The second 8-K subsequent to the appointment of the Trustee was filed April 6. It disclosed the March 31 resignation of Tad Ballantyne as an LPHI director and the termination of the employment of R. Scott Peden as LPHI general counsel. The existence of the April 6 8-K is not mentioned on the Trustee's website.

The third 8-K subsequent to the appointment of the Trustee was filed April 9. It disclosed that the bankruptcy court judge held a hearing on April 6 on the Trustee's motion to amend company documents to appoint the Trustee as the sole director of LPHI's two operating subsidiaries and, if the Trustee so chooses, to place the subsidiaries in bankruptcy. It also disclosed that the judge granted the motion and that the Trustee is moving to place the subsidiaries in bankruptcy. The existence of the April 9 8-K is not mentioned on the Trustee's website, although elsewhere on the Trustee's website the reader is given access to the bankruptcy court documents relating to the Trustee's motion, the hearing on the motion, and the bankruptcy court judge's granting of the Trustee's motion.

General Observations
I still think the Trustee and the bankruptcy court judge will make their decisions in the best interests of all parties affected by the LPHI bankruptcy. However, I am disappointed by the inadequacy of the Trustee's website in keeping affected parties informed of developments.

In view of the importance of the frequently asked questions and the answers to them, I am offering a complimentary six-page PDF containing the April 17 8-K report and the exhibit showing the questions and answers. Send an e-mail to jmbelth@gmail.com and ask for LPHI's April 17 8-K.

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Monday, April 20, 2015

No. 94: The New York Times Article About the Life Insurance Shell Game—Further Observations

In No. 93 posted April 17, I discussed the April 12 article in The New York Times entitled "Risky Moves in the Game of Life Insurance." I also mentioned my writings about efforts to weaken life insurance reserves, including my recent blog items about some of the transactions mentioned in the Times article. Here I present some further observations.

Comment from Athene
In No. 93 I said Athene, one of the companies named in the Times article, released a two-page comment expressing disappointment with the article and the reporter. I am concerned about Athene's suggestion that everything is fine because the Iowa Insurance Division reviews and approves all the transactions. My concern stems from my belief that Iowa will approve anything. I am also concerned by the assertion that Athene is "well capitalized" because it has $59 billion of assets. My concern stems from the fact that Athene said nothing about liabilities or about the quality of the assets. I offered a complimentary PDF of the Athene comment, and that item remains available.

Comment from Accordia
Accordia, another company mentioned in the Times article, released a one-page comment telling its "key partners" it is "well capitalized and managed to meet its long-term commitments to policyholders." It mentions, among other things, its $7.7 billion of assets, its financial strength ratings, and its risk-based capital ratio. It also says its arrangements are approved by state regulators, reviewed by rating agencies, and assessed by an actuarial firm. Accordia does not directly criticize the Times article or the reporter.

More on Anagrams
I said in No. 93 that one of the phony entities mentioned in my No. 73 (posted November 16, 2014) and in the Times article is a Delaware-based LLC named Tapioca View, and that I learned recently the name of the entity is an anagram of "Iowa captive." I also mentioned several entities named Cape Verity, said "yer captive" was the best anagram I was able to see, and asked for help from readers who are good with anagrams.

One reader came up with "rye captive," but I think that is not much of an improvement. Another reader, with quite a sense of humor, came up with "creepy vatic." My dictionary says "vatic" is an adjective meaning "prophetic" or "oracular." I question such an anagram, because I think it should consist of an adjective and a noun rather than two adjectives. I remain open to further suggestions.

The Words of a Life Insurance Veteran
A few hours after No. 93 was posted, comments arrived from a person connected with the life insurance business for about 40 years. He called his comments a "rant," but I found them interesting. Here are some of them, which I edited without his permission.
Tax laws enacted for one reason are being used for a very different reason. But I guess it is the business of tax lawyers and CPAs to find every lawful means of reducing their clients' tax burdens, even if it means getting their clients into dubious and otherwise unnecessary business activities.
Buried deep in this is the fact that genuine captives, if any still exist, have a legitimate role for firms which would be tempted to self insure but want a degree of financial discipline behind self insuring—possibly to address concerns raised by nervous board members and others. The expression "captive insurer" is being used to describe wildly different things, which cannot be of much comfort to those with legitimate captives that have financial reality to them.
You mentioned Spencer Kimball, who wrote the insurance codes of two or three states. His philosophy of regulation differed from that in New York, where everything is prohibited unless specifically permitted. Kimball felt everything should be permitted unless specifically prohibited. Behind Kimball's philosophy was the idea that insurance companies would never do something to harm their own long-term interests. That is why codes developed by Kimball do not include insurable interest provisions. He asked why any insurance company would ever want to issue insurance that lacked insurable interest, not because of public policy, but because of bad claims experience. So there is no insurable interest statute in those codes, just common law.
I think Kimball did not anticipate a world of insurance companies run by non-insurance people. They do not understand reserves because the lines of business they came from have no reserves. They have no conception of long-term contractual obligations because the lines of business they came from freely and without consequence go out of business, or merge, or morph, and cease doing or making the things that gave their companies their names. Annuities with the name of a piano company on them [Baldwin United] were one of the first examples, and we saw how that turned out. I also think Kimball did not anticipate the rise of a class of actuary who is as much a loophole chaser as any tax and estate lawyer.
Even insurance companies that retain their fine old names are now run by folks from the securities business (you can blame or credit the rise in variable products for that) and they take a totally different view of long-term obligations and how they are funded. Ironically (and this may offend you and your lifelong crusade for rigorous disclosure) the securities business has become accustomed to doing whatever it damn well pleases, because no law tells them otherwise, so long as it can be obscurely but "lawfully" disclosed. But if those reading and actually understanding the disclosure do not care or react (Iowa Insurance Division, anyone?), a disclosure regime such as that on which securities laws are based can permit very adverse activity to go unchecked.
Disclosure is fine, but the history of the insurance business shows that what it needs is some substantive regulatory control and direction. I think most "real" insurance people understand that, but it is not a friendly or familiar concept to the many insurance company top officers who did not come from jobs in the insurance business. I think any number of regulatory problems facing the life insurance business are impacted by the fact that in cold reality there are precious few insurance people, as I would use the expression, left in charge or even in a position to act or speak.
The people running too many insurance companies today would be offended by the very thought of product design that rewards old customers who are no longer buying more stuff. And while they issue policies that in theory are good for 120 years, they do not look fondly on those who keep them in force for 40 years. In short, the world of life insurance has been turned on its head from everything I learned starting 40 years ago.
Available Material
In No. 93 I offered the Athene comment and mentioned the items I offered in my earlier related blogs. Those items are still available.

At this time I am offering a complimentary PDF containing the Accordia comment. Send an e-mail to jmbelth@gmail.com and ask for the Accordia response to the Times article.

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Friday, April 17, 2015

No. 93: The New York Times Examines the Life Insurance Shell Game

The Sunday, April 12, 2015 issue of The New York Times carried a 3,185-word article entitled "Risky Moves in the Game of Life Insurance." The subtitle is "Complex and mostly hidden maneuvers may end up costing taxpayers and policyholders." The article was written by Times reporter Mary Williams Walsh. It began at the bottom of the front page of the business section and the remainder filled the fourth page of the section. The article included a cartoon of a shell game, a chart, and a photograph of Elizur Wright. In 1858 Wright was appointed the insurance commissioner of Massachusetts, thereby became the first insurance regulator in the U.S., and is known today as the "Father of Life Insurance." The electronic version of the article was posted on the Times website on April 11.

Two Interesting Items
An interesting item in the Times article followed a discussion of details of transactions the reporter had seen in public documents. The discussion related to several companies controlled by Goldman Sachs and was followed by this sentence: "The company and its parent declined to confirm the details in those records or comment on the record." One can only wonder why a company would decline to confirm or comment on public information.

Another interesting item in the Times article was a statement that Nick Gerhart, the Iowa insurance commissioner, expressed in an e-mail to the reporter. He called captive reinsurance "a pragmatic approach to address the nationally recognized problem of redundant reserves." The expression "redundant reserves" is used by those intent on dismantling a regulatory system that has stood the test of time for more than 150 years. In other words, they want a system that allows them to reap short-term profits at the expense of long-term financial strength.

I am reminded of the views of the late Spencer L. Kimball, who during his career was the leading scholar in the area of insurance regulation. Kimball said the primary objective of insurance regulation is not the mere solvency of insurance companies, but rather the solidity of the companies. One can only imagine what he would say about promoters who embrace the expression "redundant reserves."

My Writings on the Subject
I wrote extensively in The Insurance Forum about efforts over the years to weaken life insurance reserves. I also wrote on my blog about some of the transactions mentioned in the Times article. See Nos. 44 (April 22, 2014), 66 (August 21, 2014), 71 (November 6, 2014), 72 (November 12, 2014), and 73 (November 16, 2014).

Anagrams
One of the phony entities mentioned in my blog post No. 73 and in the Times article is a Delaware-based LLC named Tapioca View. It issued a $499 million "contingent note," whatever that is, to be carried as an asset by an affiliate. I learned recently that the name of the entity is an anagram, the dictionary definition of which is "a word or phrase made by transposing the letters of another word or phrase." "Tapioca View" is an anagram of "Iowa captive." I think the name of the entity provides insight into the thought process of promoters of captive reinsurance. I do not know whether Commissioner Gerhart and his staff were aware of the anagram.

In No. 73 I also mentioned several entities named Cape Verity. I tried to figure out whether that name is also an anagram. However, all I could get out of it was "yer captive." I would welcome help from readers who are better than I am with anagrams.

General Observations
In my opinion, the Times article is an excellent study of a complex subject and an important contribution toward public understanding of captive reinsurance. Superintendent Benjamin Lawsky of the New York Department of Financial Services calls it "shadow insurance." It is a serious problem facing the life insurance business.

I think the Times article should be read by anyone with an interest in the welfare of the life insurance business and the millions of people who depend on life insurance to protect their beneficiaries. Many readers will find the article difficult to understand, but that is the fault of the perpetrators of the schemes rather than a shortcoming of the article. In other words, promoters of captive reinsurance schemes intend for the schemes to be opaque and incomprehensible, because they would not be permitted if they were disclosed and understood.

In my blog items mentioned above, I offered as complimentary PDFs some documents relating to matters discussed in the Times article. Those documents remain available upon request. At this time I am offering a complimentary two-page PDF containing an April 14 response from Athene, one of the companies mentioned in the Times article. The response apparently was prepared for agents who expressed concerns about the Times article. Send an e-mail to jmbelth@gmail.com and ask for the Athene response to the New York Times article.

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Friday, March 27, 2015

No. 92: Life Partners' Bankruptcy—A Few Recent Developments

As I reported in No. 90 posted March 17, H. Thomas Moran II has been appointed the Chapter 11 Trustee in the federal bankruptcy court proceedings involving Life Partners Holdings, Inc. (LPHI). I wrote extensively about LPHI in The Insurance Forum over a period of 15 years, and I posted 23 items about the company on my blog over the past 15 months. Here I report a few recent developments.

Trustee Appointment Status
On March 10, as I previously reported, Bankruptcy Court Judge Russell F. Nelms ordered the U.S. Trustee to appoint a Chapter 11 Trustee for LPHI. On March 13, the U.S. Trustee appointed Moran the Chapter 11 Trustee, subject to the approval of Judge Nelms. On March 19, Judge Nelms approved the appointment.

Delisting by Nasdaq
On March 18, Nasdaq announced it had halted trading in LPHI shares after the close of trading that day. The last price was 24 cents per share. Nasdaq said trading will remain halted until LPHI "has fully satisfied Nasdaq's request for additional information."

In an 8-K (material event) report that LPHI filed with the Securities and Exchange Commission (SEC) on March 12, LPHI said a hearing on the matter of delisting was scheduled for March 19. It is my understanding that Moran canceled the hearing.

First Posting by Moran
On March 20, Moran posted the first item on a new website at www.lphitrustee.com to communicate with interested parties. The item describes the background of the case, comments briefly on the current status of the case, identifies four attorneys from the Dallas firm of Thompson & Knight LLP, and invites interested parties to submit questions to questions@lphitrustee.com. Following that initial posting, additional material has been posted for the information of interested parties.

Seizure of Pardo's Property
On March 23, according to local newspaper and television reports in Waco, Texas, LPHI's home city, federal law enforcement officials seized luxury vehicles from the home of Brian Pardo, the former chairman and chief executive officer of LPHI. According to the reports, at least two Mercedes vehicles were confiscated. Pardo has not paid the $6.2 million civil penalty imposed on him by the federal district court and, as I reported in No. 88, the federal district court has placed liens on Pardo's property.

An Important Filing
On March 25, on behalf of Moran, attorneys at Thompson & Knight filed an emergency motion to amend LPHI's governing documents and to file voluntary Chapter 11 petitions for LPHI's two subsidiaries. They are Life Partners, Inc. (LPI), which is LPHI's operating subsidiary in the secondary market for life insurance, and the recently formed LPI Financial Services, Inc. (LPIFS).

The motion describes the background of the case, including the civil lawsuit by the SEC. Aside from the bankruptcy case and the SEC case, the motion says there are 11 open cases against LPHI/LPI in federal courts and 12 open cases against LPHI/LPI in state courts (seven in Texas, three in California, one in Florida, and one in Illinois). Also, LPHI is appealing the decision in the SEC case to the U.S. Court of Appeals for the Fifth Circuit, and is appealing decisions of two Texas appellate courts to the Texas Supreme Court. Here is the concluding paragraph of the motion:
WHEREFORE, the Trustee respectfully requests that this Court enter an order granting this Motion in its entirety and authorizing him to cause [LPHI], LPI, and LPIFS, as applicable, to (i) remove the current members of the boards of directors of LPI and LPIFS, (ii) amend the governing documents of LPI and LPIFS, entities wholly owned and managed by LPHI, (iii) elect the Trustee as the sole director of each of LPI and LPIFS, (iv) take such actions as are necessary to cause LPI and LPIFS to file voluntary chapter 11 bankruptcy petitions, seeking joint administration with the estate of [LPHI], and (v) granting such other and further relief this Court deems just and proper.
General Observations
The actions taken in coming weeks by Moran and Judge Nelms bear close watching. I think they will make their decisions in what they believe are the best interests of all parties affected by the LPHI proceedings.

I am offering a complimentary PDF containing the 18-page emergency motion that Moran just filed in the bankruptcy court. Send an e-mail to jmbelth@gmail.com and ask for the LPHI/Moran March 25 motion.

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Monday, March 23, 2015

No. 91: Northwestern Mutual—The Proposed Settlement of a Long Dispute over Annuity Dividends

On March 13, 2015, Marleen M. LaPlant, the plaintiff in a long dispute with Northwestern Mutual Life Insurance Company (Milwaukee, WI), filed in federal court a motion for preliminary approval of a settlement. The case relates to a change the company made in 1985 in its method for determining dividends on certain previously issued fixed dollar annuities. The company has agreed to the settlement.

Origin of the Dispute
Prior to 1985, Northwestern determined annuity dividends based on investment returns on the company's entire general account. In the early 1980s, the U.S. experienced an inverted yield curve, where short-term interest rates were higher than long-term interest rates. In 1985, the company introduced "MN annuities" that were credited with dividends based on the interest earnings from a portfolio of short-term bonds. At the same time, the company began crediting dividends on previously issued ("pre-MN") annuities based on the interest earnings from the portfolio of short-term bonds. In the short term, the change meant larger dividends on the pre-MN annuities, but over the long term—when interest rates returned to normal levels—it meant the dividends on the pre-MN annuities were smaller than if the dividends had been based on the investment returns on the company's entire general account.

A major problem was the manner in which Northwestern instituted the change regarding the pre-MN annuities. The company changed the method of determining dividends on the pre-MN annuities without advance notice to the annuitants, without disclosing the change to the annuitants, without offering the annuitants the opportunity to accept or reject the change, and by phasing in the change in such a way as to make it difficult for the annuitants to be aware of the change.

The LaPlant Lawsuit
In August 2008, LaPlant filed a class action lawsuit in state court in Wisconsin on behalf of herself and other pre-MN annuitants. She alleged that Northwestern, in determining dividends on the pre-MN annuities, had breached the contracts and breached its fiduciary duty. The company said it had not breached the contracts and had not breached its fiduciary duty. The company also said its method of determining dividends was consistent with the contracts, did not violate Wisconsin law, was in accordance with actuarial standards, and had been approved by insurance regulators. (See LaPlant v. Northwestern, State of Wisconsin, Milwaukee County Circuit Court, Case No. 08-cv-11988.)

In October 2009, Reserve Circuit Judge Dennis J. Flynn certified a state class. In November 2010, he presided over a two-week bench trial. In March 2011, he handed down a 97-page decision saying the company had breached the contracts and breached its fiduciary duty.

My Articles about the Case
I felt the case was important, and wrote about it in the lead article in the May 2011 issue of The Insurance Forum. I wrote follow-up articles in the July 2011, June 2013, and December 2013 issues. In the conclusion of the first of the four articles, I said:
Northwestern has long and justifiably prided itself on fair treatment of participating policyholders. That is why this case is a major defeat for the company.
The Recusal Motion
Three weeks after Judge Flynn's decision, Northwestern filed a motion that the judge recuse himself. The company had discovered that the judge owned a pre-MN annuity that he had surrendered in 1979, six years before the company made the change in its method of determining dividends on the pre-MN annuities. The cash surrender value of the judge's annuity was $1,456. Judge Flynn denied the recusal motion.

Northwestern petitioned the Wisconsin Court of Appeals to hear an appeal of the denial of the recusal motion. The appellate court denied the petition.

The Regulatory Issue
Northwestern said it had obtained regulatory approval of the 1985 change in the method of determining dividends on the pre-MN annuities. In 1984, the company informed the New York Department of Insurance of the change. The company said it intended to disclose the change in releases to its agents and the media, in its annual report, and in dividend notice stuffers sent to annuitants. The Department approved the change conditioned on those disclosures. However, the company did not make the disclosures.

Northwestern informed the Wisconsin Office of the Insurance Commissioner of the change and the New York Department's approval of the change. The Office raised no objections, and the company viewed the change as having been approved by the Office.

Recent Developments
In 2010, the parties, with the help of a mediator, attempted to resolve the dispute by reaching an agreement. The effort failed.

In September 2011, LaPlant filed a motion to expand the state class (about 3,300 annuitants) to a national class (about 33,000 annuitants). Northwestern removed the case to federal court. LaPlant filed a motion in federal court to return the case to the state court. In August 2012, the federal district court granted the motion to return the case to the state court. (See LaPlant v. Northwestern, U.S. District Court, Eastern District of Wisconsin, Case No. 2:11-cv-910.)

Northwestern appealed the federal district court decision. In November 2012, a three-judge appellate panel vacated the federal district court decision and sent the case back to the federal district court to decide whether to expand the state class to a national class. (See LaPlant v. Northwestern, U.S. Court of Appeals, 7th Circuit, Case No. 12-3264.)

In March 2013, LaPlant filed a motion in the federal district court to expand the state class to a national class. Northwestern opposed the motion and filed a motion to decertify the Wisconsin class. The court has not acted on those motions.

In May 2014, the parties, with the help of a different mediator, undertook a second effort to resolve the dispute by reaching an agreement. This time the effort succeeded. On September 9, 2014, the parties entered into a memorandum of understanding to resolve all the claims of the national class, including the claims in the related cases. They selected a settlement administrator, a notice provider, and an escrow agent. Later they entered into the recently announced settlement.

The Proposed Settlement
Plaintiff experts estimate that the losses suffered by the annuitants are from $100 million to $278 million. Northwestern disputes that there are any damages.

The gross amount of the settlement is $84 million. That will be reduced by plaintiff attorneys' fees in the LaPlant case and the related cases (not to exceed 35 percent of the gross amount of the settlement), plaintiff attorneys' expenses, cost of notice to class members, cost of claims administration, and payments to class representatives in the various cases. I think the net amount of the settlement will be around $50 million.

The recent motion asks the federal district court to approve the settlement on a preliminary basis to allow notices to be sent to the annuitants, and to certify the national class solely for purposes of the settlement. The notices will explain the case. The annuitants will be given the opportunity to opt out of the settlement, register objections, and be heard at the final fairness hearing. According to the proposed schedule, final court approval is at least five months away.

General Observations
LaPlant and the plaintiffs in the related cases did not commence legal action when they were receiving larger dividends than they would have received without the 1985 change. In other words, they took action only when they began receiving smaller dividends as a result of the change. That may be a partial explanation for Northwestern's long and bitter opposition to the lawsuit. For example, the company's recent letter to employees announcing the settlement includes this sentence:
According to Rodd Schneider, vice presidentlitigation counsel in the Law department, the lawsuit was a case of a small group of customers seeking more than its fair share of dividends, which would have come at the expense of all our other policyowners.
On the other hand, it is also true that Northwestern made the change unilaterally and sought to conceal it. That was out of character for the company. In previous situations, the company announced policy or contract changes and offered policyholders the opportunity to accept or reject the changes. For example, in the 1970s the company announced a policy loan interest rate amendment program. The company had begun issuing policies with a variable policy loan interest rate subject to a maximum of 8 percent. In the amendment program, the company offered policyholders with a 5 percent or 6 percent fixed policy loan interest rate the opportunity to change to the variable policy loan interest rate subject to the 8 percent maximum. In exchange for agreeing to the amendment, policyholders became entitled to enhanced dividends.

In my opinion, the lawsuits were justified. I also believe that Judge Flynn got it right. Whether the settlement will receive final approval remains to be seen.

Available Material
For those keenly interested in the case, I offer a complimentary 86-page PDF consisting of five documents: the 3-page motion, the 24-page memorandum in support of the motion, the 4-page declaration in support of the motion, the 3-page plan of allocation, and the 52-page settlement agreement. Send an e-mail to jmbelth@gmail.com and ask for the settlement package in the LaPlant case.

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Tuesday, March 17, 2015

No. 90: Life Partners—The U.S. Trustee Appoints Thomas Moran the Chapter 11 Trustee

On March 13, 2015, the U.S. Trustee appointed H. Thomas Moran II the Chapter 11 Trustee in the Life Partners Holdings, Inc. (LPHI) bankruptcy case. The appointment of Moran is not a surprise; as mentioned below, the Securities and Exchange Commission (SEC), even before LPHI's bankruptcy filing, recommended that the district court appoint Moran the receiver. He is chief executive officer of Asset Servicing Group LLC, 521 West Wilshire Boulevard, Suite 200, Oklahoma City, OK 73116, telephone (405) 753-9100. Biographical information about him and his associates is on the company's website (www.asgllc.us).

Background
LPHI is the parent of Life Partners, Inc. (LPI), an intermediary in the secondary market for life insurance. In January 2012, the SEC filed a civil lawsuit against LPHI and its top officers alleging violations of federal securities laws. The case was assigned to U.S. Senior District Court Judge James R. Nowlin. After the trial in January 2014, the jury found in favor of the defendants on some allegations and against the defendants on some allegations.

On December 2, 2014, Judge Nowlin handed down an Order. On January 16, 2015, he handed down a Final Judgment confirming the terms of his December 2 Order. He imposed civil penalties on LPHI of more than twice the company's total assets. Also, he imposed large civil penalties on two LPHI officers: Brian D. Pardo, chairman and chief executive officer; and R. Scott Peden, general counsel.

Other Recent Developments
On January 5, 2015, the SEC filed a motion for the appointment of a receiver to "protect investors and LPHI's creditors," "ensure that its current officers...are unable to continue to waste assets," and "ensure that LPHI is operated in compliance with the federal securities laws." The SEC recommended that Moran be appointed the receiver. (See SEC v. LPHI, U.S. District Court, Western District of Texas, No. 1:12-cv-33.)

On January 20, LPHI filed for protection under Chapter 11 of the federal bankruptcy law. The case was assigned to U.S. Bankruptcy Court Judge Russell F. Nelms. On March 10, Judge Nelms ordered the U.S. Trustee to appoint a Chapter 11 Trustee for LPHI. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, No. 15-40289.)

General Observations
It will be interesting to see Moran's progress reports. In light of the comments by Judge Nelms in the March 9 hearing that preceded his March 10 Order (I offered the hearing transcript in No. 89), I think he and Moran will do everything possible to protect those with fractional interests in LPI's life settlements.

I offer a complimentary 14-page PDF consisting of the 2-page March 13 notice of Moran's appointment and the 12-page January 5 SEC motion for appointment of a receiver in the district court case. Send an e-mail to jmbelth@gmail.com and ask for the SEC-LPHI March 17 package.

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